An end to student loan corruption

10/6/2009, 6:58 a.m.

“There he goes again, trying to take over the student loan business and killing our profits.”

An end to student loan corruption

The spiraling cost of college education is creating a financial crisis for many families. While salaries for the working class, and even the lower middle class, have been stagnant for several years, college costs have been increasing at twice the rate of inflation. On the average, it is estimated that tuition and fees increase by 5 percent a year and room and board goes up annually by 3.8 percent.

Even families that have prudently saved and invested to finance their children’s education have seen their assets decline in the present recession. Often, their only options are to direct their children away from the expensive, elite colleges or to saddle the family with debt.

The government established the Federal Family Education Loan Program in 1965 to subsidize and guarantee college loans issued by private companies. The federal guarantees eliminated risk for lenders, and the substantial rate of interest on the loans assured profits. Banks and credit companies competed vigorously to enter this market. Soon, the competition got out of hand.

Some companies began offering improper inducements to college financial aid officers in order to command referrals from parents seeking loans. The inducements included well-paid positions on advisory boards for the lender, paid vacations and even stock in the company at a preferential price.

The situation became so extreme that Attorney General Andrew M. Cuomo of New York began an investigation in the spring of 2007. Cuomo called these practices deceptive because they created a conflict of interest; parents could no longer believe that the financial advice of college financial aid officers was unbiased.

On top of that, parents paid for the inducements in the form of higher rates of interest on their loans. Rather than providing a solution to a serious problem, private enterprise took the opportunity to increase the burden on already beleaguered families.

President Barack Obama proposed a plan for the government to provide all college loans directly and eliminate guarantees and subsidies to private lenders. The House of Representatives voted 253-171 on Sept. 17 to support Obama’s proposal. House Republicans lost an earlier vote, 265-165, on an amendment to allow private lenders to continue marketing student loans.

According to the Congressional Budget Office, the Obama plan would save the government $80 billion over 10 years, and it would save families billions in excess interest payments. It is now up to the Senate to vote for this needed bipartisan proposal.

Obama has said that the money saved would be used to provide greater access for families to low-cost education loans. As expected, conservatives complained of a “rush to a government takeover” of the student loan business. They were insensitive to the many families that were priced out of higher education.

Republicans also made a plea for the loan companies that would be forced to close and put people out of work. However, some companies will survive to service the federal loans.

The Republican argument seems to be that free-market capitalism should require the government to use taxpayers’ money to guarantee education loans and enable private companies to set interest rates high enough to provide substantial executive salaries, marketing inducements and investor dividends.

The Republican approach is not a satisfactory arrangement for taxpayers or for families with children to educate.